Paying More Than Asking Price for the House

paying more than asking priceBefore I talk about overpriced offers, let’s consider overpriced listings. Some home buyers in Sacramento complain about overpriced listings and wonder if they’ll offend the seller by submitting a lower offer, so they don’t even try. I tell buyers that if you’re not getting an offer accepted, maybe it’s because you’re an FHA buyer or a VA buyer and not conventional or cash, and you’re barking up the wrong trees. It’s the conventional and cash buyers that are sucking up much of the limited inventory in Sacramento. But another reason why buyers are not getting their offers accepted might be because they’re chasing after the wrong properties. They want what everybody else wants: those immaculate 3-bedroom, 2-bath, affordable homes. Maybe they should be looking at overpriced homes where there is no competition!

On the flip side, some buyers are writing overpriced offers. These buyers are desperate. Overpriced offers are almost as frustrating as an overpriced listing but few agents are talking about overpriced offers. That’s because buyers are sometimes short-sighted. They don’t know what else to do but offer a higher price, yet a higher price is actually working against them in most cases. You don’t know how many offers I receive in which I try to help buyer’s agents by explaining their offer appears too high. Why should those words have to come out of my mouth?

An overpriced offer is especially a huge problem on a Sacramento short sale. Let me illustrate for you. Say, a home is listed at $200,000, and the comparable sales over the past 3 months justify a price of $195,000. With the way the seller’s market is moving in Sacramento, $200,000 is a reasonable price 60 to 90 days later when the approval is likely to be received. Along comes Mary Home Buyer who offers $220,000. If the seller accepts that offer, it’s a long shot that it will appraise by Mary’s lender.

So, down the road, we get the approval letter from the bank at $220,000. Mary’s lender’s appraiser comes in at $200,000. We then go back to the bank, and maybe there are two lenders so now we have to ask 2 banks to adjust their approval letter. The primary lender refuses. Nope, that bank wants $220,000. The bank might feel we can put it back on the market and find a cash buyer for $220,000, some cash buyer who won’t rely on an appraisal. The deal blows up.

Thanks, Mary.

No other cash buyers step forward at that price and then the home goes to foreclosure. Because we’ve established the bank’s expectations at $220,000, we’re hosed. The seller is hosed, the agents are hosed and future buyers are hosed. Some buyer’s agents will say: But wait, my buyer will bridge the gap in the event of a low appraisal. They will pay the difference, if any, in cash. That’s all well and fine until push comes to shove and the buyer realizes she can cancel under the 17-day inspection contingency even without the appraisal contingency. Which makes a no-appraisal contingency pretty much worthless. Think about it.

On top of this, regardless of how this Sacramento short sale agent tries to nail buyers to the front door and, believe me, I have my methods, the odds are almost 3-to-1 that the buyer who goes into escrow on a short sale will somehow manage not to close escrow.  And those are the good odds, the odds that an agent who knows how and has closed hundreds, gets. Buyers will lose their job, somebody will die, their FICOs will change, they find repairs they can’t afford, they blew the down payment on an emergency, the lender didn’t qualify them properly in the first place — there are dozens of reasons why buyers mess up. Once we start the short sale approval process, we can often easily slip in another buyer, but that offer needs to be at similar terms and sales price.

This means the first offer accepted will set the precedent for the second offer, should the first offer fail. And a smart Sacramento short sale agent realizes this and will advise her sellers to reject overpriced offers. There are so many ways a short sale can fail, let’s not increase the odds by encouraging buyers to submit overpriced offers, because that’s just sabotaging the buyer’s chances of buying a home.

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